Pension model doesn’t have to be perfect, but we must act now

Pension model doesn’t have to be perfect, but we must act now

Stock imageAustralia has one of the world’s strongest mandatory superannuation schemes. Stock image

The retirement model for Ireland is changing after various false starts – a change that is long overdue. A sustainable retirement system with feasible dependency ratios requires that workers save more and retire later.

We won’t get a perfect system overnight, so having one that’s “good enough”, at least to start, is an important priority.

The key thing is to take the first step and raise pension coverage immediately, or risk further delays in reform.

That’s why the publication this week of the Government’s consultation paper on supplementary pension provision in Ireland has the potential to be such a landmark moment.

It’s critical that we grasp the nettle with both hands and take decisive action to increase supplementary pension coverage in this country.

The Government’s Roadmap to Pensions Reform, published in February, set out important measures to improve the financial security of Irish people in retirement, such as evolving the state pension age and the introduction of automatic enrolment.

Measures to improve the adequacy of the State pension can only be good news. However, with only around 35pc of Irish private-sector workers enrolled in occupational pension schemes, we can’t stop there.

We’re not the only country facing a timebomb when it comes to pensions – this is a global issue.

In setting off on a path of reform though, we have the advantage of being able to follow in the footsteps of other countries that have gone before, replicating some of what works and taking lessons from what does not.

Our nearest neighbours took this route only a few years ago. More than 10 million UK workers have been enrolled in DC plans since 2012, when employers were required to enrol staff in a workplace pension, and experience in the UK has shown that, once members are auto enrolled in a well-designed scheme opt-out levels are extremely low – at fewer than one in 10.

Appreciation of human behaviour needs to be at the heart of pension policy and is key to the successful implementation of any scheme.

A successful automatic enrolment system requires a well-designed ‘default’ investment strategy that people will not be inclined to opt out of.

Expecting ordinary citizens to make investment decisions that will impact on their future financial security is a big ask, and may not be welcomed by many.

People may struggle to choose appropriate investments, and indeed research this year showed us that only 32pc of Irish DC members knew what their pension was invested in.

That’s why a default option that is well-diversified, good value and appropriate for the life stage for the saver in question is so important.

We will be faced with many tough questions at the start of this journey: are the measures being proposed going to be enough; will the contribution level be high enough; what approach do we take to increasing contributions over time; is there a better default strategy that we could design?

We’re not going to get all of this right on the very first attempt.

‘Good enough’ is an is an important priority here. A ‘perfect’ system will not be established overnight, so it is important to take the first step and raise pension coverage immediately, or risk further delays in reform.

As we progress on the path we can tweak and adapt as the system becomes established.

Consider a country like Australia, which has one of the strongest mandatory superannuation schemes in the world.

Contribution levels there now stand at 9.5pc and are scheduled to increase to 12pc and in time they will probably wish to go higher.

Similarly, the situation in the UK is evolving as time passes. Since April 2018 total minimum contribution rates stood at 5pc and this will increase to 8pc in April 2019, with many commentators suggesting further increases after that.

Auto enrolment is one of a suite of measures proposed in the Government’s Roadmap to Pensions Reform.

The roadmap comes at a time when dependency ratios are increasing and fresh approaches to better managing longevity risk and rectifying deficits in pension provision are hugely important.

We all know we need a sustainable retirement system. Now is the time for action.